Mistakes People Make When Things Are Going Well
Episode 351 - People make financial mistakes all the time, in good times and bad. What are some of the things that people get wrong when things are going well? In a recent article from ThinkAdvisor, author Bryce Sanders outlined what he believes are some of the errors people tend to make when things are looking rosy.
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Transcript of Podcast Episode 351
Hello, this is Bill Rainaldi, with another edition of Security Mutual’s SML Planning Minute. In today’s episode, mistakes people make when things are going well.
Even for the wealthiest among us, managing your finances is never easy, even when everything is going just great. It’s easy to fall victim to overconfidence, and the results can be devastating. In a recent article from ThinkAdvisor, author Bryce Sanders took a look at some of the mistakes people make when things are looking rosy.
[1] Here are some of the highlights.
* Thinking paper profits are real. This is something referred to as the “wealth effect,” which we discussed back in episode 306. It’s the idea that you may feel rich when you look at your statement, but things can change in a hurry. There’s a huge difference between “realized” and “unrealized” gains, and when the time comes to sell, they may not be the same.
* Forgetting about your “silent partner.” For many of us, our 401(k) is our favorite investment when we’re accumulating it, but our least favorite when we’re collecting from it. Why? Our silent partner—the IRS—is going to grab a piece of the pie, and they have a big appetite. One way or another, they will get their share. For some of us, there are additional choices that may be appropriate, such as a Roth account or cash value life insurance.
* Having too much in one stock. Congrats on getting Nvidia or Tesla early on. But what happens when that stock becomes the majority of your portfolio? Is it worth riding the course? Maybe but…previous generations have learned the hard way from companies such as Lucent Technologies, Enron, and Blackberry. It may be a good idea to take some profits and spread some of that money around. The same applies even when you’ve got a lot of your money tied up in just one industry, never mind just one stock.
* Excessive borrowing. You could be so convinced that a certain investment is a great value, that you decide to buy it “on margin,” that is, you borrow against the rest of your portfolio to pay for it. But what if you’re wrong? The last thing you want is what is called a “margin call,” which is when the financial institution demands that you deposit more money into the account. This may occur if the value of your new favorite stock goes down significantly.
* Thinking that the good times will never end. When a TV pundit predicts that a major crash is coming, he’s probably right. That’s the easy part. The tough part is knowing when. It could be in ten years, next year, or tomorrow.
